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NZD/USD Rate Rebound Undermined by RSI Divergence

NZD/USD Rate Rebound Undermined by RSI Divergence

David Song, Strategist

New Zealand Dollar Talking Points

NZD/USD managed to clear the June high (0.6585) earlier this month as the US Dollar weakened against most of its major counterparts, but the Relative Strength Index (RSI) appears to be diverging with price as the indicator flops ahead of overbought territory.

NZD/USD Rate Rebound Undermined by RSI Divergence

NZD/USD appears to be making a run at the monthly high (0.6601) as it attempts to retrace the decline from earlier this week, and the New Zealand Dollar may continue to outperform against its US counterpart as the IG Client Sentiment report continues to reflect crowding behavior in the currency market, with retail traders net-short NZD/USD since May.

Image of IG Client Sentiment for NZD/USD

The most recent update shows 31.84% of traders are net-long NZD/USD versus 30.65% during the first full week of July, with the ratio of traders short to long at 2.14 to 1.The number of traders net-long is 12.69% lower than yesterday and 9.66% higher from last week, while the number of traders net-short is 12.12% lower than yesterday and 16.64% lower from last week.

The recent decline in net-long exposure could be attributed to profit taking behavior as NZD/USD consolidates after clearing June high (0.6585), while the contraction in net-short interest suggests stop orders are getting triggered as the New Zealand Dollar continues to outperform its US counterpart.

It remains to be seen if the crowding behavior in the currency market will persist as open interest narrows 9.75% from the previous week, but current market conditions may keep NZD/USD afloat ahead of the next Reserve Bank of New Zealand (RBNZ) interest rate decision on August 12 as central bank appears to be on track to keep the official cash rate at the record low of 0.25%.

Looking ahead, it seems as though the RBNZ is in no rush to provide additional monetary support after expanding the Large Scale Asset Purchase (LSAP) program in May, and the central bank may carry out a wait-and-see approach over the coming months as “fiscal policy measures are expected to support economic activity.”

In turn, the RBNZ may unveil a less dovish forward guidance as Governor Adrian Orr and Co. pledge to “outline the outlook for the LSAPprogramme and our readiness to deploy alternative monetary policy tools in our August Statement,” and the recovery in the New Zealand Dollar may continue to outperform its US counterpart in the second half of 2020 if the central bank tames speculation for additional monetary support.

However, the RBNZ may keep the door open to implement a negative interest rate policy (NIRP) as Chief Economist Yuong Ha reveals that “we’ve given the banking system until the end of the year to get ready so that the option is there for the Monetary Policy Committee in a year’s time,” and bets for a NIRP in New Zealand may produce headwinds for NZD/USD as Federal Reserve Chairman Jerome Powell rules out negative US interest rates.

With that said, current market conditions may keep NZD/USD afloat as the crowding behavior in the current market persists, but recent developments in the Relative Strength Index (RSI) warn of a potential pullback in the exchange rate as the indicatorsnaps the upward trend from March and flops ahead of overbought territory.

Sign up and join DailyFX Currency Strategist David Song LIVE for an opportunity to discuss potential trade setups.

NZD/USD Rate Daily Chart

Image of NZD/USD rate daily chart

Source: Trading View

  • Keep in mind, NZD/USD cleared the February high (0.6503) in June as the Relative Strength Index (RSI) broke above 70 for the first time in 2020, and the exchange rate may continue to retrace the decline from earlier this year as it takes out the June high (0.6585) during the first full week of July.
  • However, the Relative Strength Index (RSI) appears to be diverging with price as the indicator snaps the upward trend from March and flops ahead of overbought territory.
  • NZD/USD appears to be making a run at the monthly high (0.6601) as it attempts to retrace the decline from earlier this week, but the failed attempt to break/close above the Fibonacci overlap around 0.6600 (38.2% expansion) to 0.6630 (78.6% expansion) may generate range bound conditions as recent developments in the RSI point to a potential shift in market behavior.
  • Failure to hold above the 0.6550 (50% expansion) has pushed NZD/USD towards the overlap around 0.6490 (50% expansion) to 0.6520 (100% expansion), with the next area of interest coming in around 0.6400 (61.8% retracement) to 0.6430 (78.6% expansion), which largely lines up with the July low (0.6440).

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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